It’s no secret that the interest rates being paid by financial institutions everywhere have decreased in this economy. If you hold funds in certificates of deposit (CDs) or a money-market account, you might be looking for ways to grow your savings or even supplement your income. Or you might be sitting on the sidelines, waiting for interest rates to go up.
Rather than wait around, you might consider investing in a fixed annuity. Many investors like annuities because of their stability, and many financial advisors* encourage CD holders to consider them, as they can offer guaranteed returns, tax deferral, and supplemental income.
What Is a Fixed Annuity?
An annuity is an insurance contract that can provide you with long-term savings and income. Fixed annuities provide protection from loss due to market downturns, guaranteed growth from a fixed rate of interest, and a guaranteed stream of income.
What are the Benefits of Fixed Annuities?
Fixed annuities offer these advantages:
- Protected returns—Fixed annuities with a multi-year guarantee (MYG) provide the promised interest rate without price changes or losses. You won’t lose your principal—and that’s an important safeguard for risk-averse investors.
- Predictable value—You can plan around the worth of an MYG fixed annuity, because you already know its annual interest rate and its exact value at the end of the term. If you don’t make withdrawals, your investment is predictable.
- Tax deferment—Assets can grow faster because you do not pay taxes on the interest earned until you withdraw it or receive a distribution, depending on your age. This allows for compounding interest of your money during the contract, like an IRA or 401(k) plan. Deferring taxes is an excellent strategy, and it matters even more if you happen to be approaching retirement.
- Access to funds—Fixed annuities allow you to make penalty-free withdrawals below a specified annual limit, often 10%. You can buy a rider that provides liquidity in the event of terminal illness or need for a nursing home. Keep in mind that taxes† apply at the time of withdrawal and removing funds can decrease your future interest earnings or income benefits later. Withdrawals taken prior to 59 ½ are generally subject to a 10% federal income tax penalty.
- Estate advantages—If you pass away while owning a fixed annuity, your money goes straight to the beneficiaries on your contract. Because the money doesn’t become part of your estate, it doesn’t go through probate, the legal process where creditors and relatives can lay claim to it.
- Stream of income—After retirement, you can convert the annuity contract value into reliable lifetime income, a process known as “annuitization.” Upon annuitizing the contract, you will receive guaranteed income for the rest of your life, like a pension.
Contact the CFS Investment team at UFCU to learn more about fixed annuities and other ways you can plan for your retirement.
What About Changing Interest Rates?
You might be wondering what happens if interest rates change while you’re holding the annuity. You can choose to convert the annuity contract value into income. If interest rates have risen when you do so, it’s possible that lifetime-income payouts might increase, too. Don’t forget that annuity rates are guaranteed, which also protects you from a further drop in interest rates. All guarantees are subject to the claims-paying ability of the issuing insurance company.
If you currently hold CDs, you might consider a fixed annuity for its longer-term tax deferment and the lifetime income option. Fixed annuities are different than bonds (or shares in a bond fund) because bond values can fall when interest rates rise. The fixed annuity option is worth looking into if you are looking for safe, reliable growth until interest rates return to more lucrative levels.
Fixed annuities are long-term financial products designed for retirement purposes. Withdrawals taken prior to 59 ½ are generally subject to a 10% federal income tax penalty. All guarantees are subject to the claims-paying ability of the issuing insurance company.
†CFS does not provide tax or legal advice. For such guidance, please consult a tax and/or legal advisor
* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. UFCU has contracted with CFS to make non-deposit investment products and services available to credit union members.